Can I Refinance My Mortgage With Only 10 Percent of My Loan Paid Out?

A mortgage refinance requires analysis to determine whether the potential benefits outweigh the cost and hassle involved. A refinance transaction pays off a previous loan with proceeds from a new loan. Your ability to refinance with only 10 percent of your loan paid out depends on how much of your home's value the lender is willing to finance, the property type and the type of refinance program you choose.

Considerations

A refinance makes the most sense when you plan to keep the mortgage long enough to reap savings obtained from a lower interest rate or change in loan program. It might also makes sense if the new loan you obtain has better terms, such as a shorter repayment period or a fixed interest rate for payment stability. The lender also considers the benefits of the transaction when deciding whether to approve your refinance; this is known as the tangible net benefit rule. Lenders require a minimum amount of equity in your home when refinancing to help offset risk and help ensure loan repayment.

Loan-to-Value

You can refinance with as little as 3.5 percent equity -- a 96.5 percent loan-to-value -- with a Federal Housing Administration loan in which the government insures the lender against default. The LTV compares the loan balance to the home's value. As such, you can have less than 10 percent of your loan amount paid out on an FHA refinance. Conventional loans, which adhere to Fannie Mae and Freddie Mac guidelines, generally carry stricter LTV standards and require more equity than government-backed loans. Typically, you need at least 10 percent equity -- a 90 percent LTV to refinance with a conventional loan.

Property Type

Lenders usually refinance loans with only 10 percent equity when the home is used as your primary residence and it consists of a single unit. These property types pose less risk of default because borrowers are less likely to default on their own home and do not rely on rental income to make the payments. As such, lenders require less equity in the home. Conventional lenders may allow you to refinance a two-unit property under certain circumstances. For example, you can refinance a two-unit home with a Freddie Mac loan if you live in one of the units and your previous loan was owned or securitized by Freddie.

Refinance Program

Certain refinance programs pose more risk to the lender than others. For example, a cash-out refinance in which you tap into your home's equity requires at least 15 percent equity because it involves an increased loan balance and payment. A rate and term refinance, also known as a no-cash-out refinance, poses less risk; therefore, allowing 10 percent equity or less. A type of no-cash-out refinance known as a streamline refinance, which requires reduced paperwork and minimal qualifying, also requires only 10 percent equity or less.

About the Author

K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.